Budget line definition investopedia forex
Gordon Scott has been an active investor and technical analyst of securities, futures, forex, and penny stocks for 20+ years. He is a member of the Investopedia. A budget variance measures the difference between budgeted and actual figures for a particular accounting category, and may indicate a shortfall. Quantitative easing (QE) is a monetary policy where central banks spur economic activity by buying a range of financial assets in the market. DASH BUS FARE
This situation is often referred to as a balance of payments deficit, using the narrow definition of the capital account that excludes central bank reserves. In reality, however, the broadly defined balance of payments must add up to zero by definition. In practice, statistical discrepancies arise due to the difficulty of accurately counting every transaction between an economy and the rest of the world, including discrepancies caused by foreign currency translations.
The sum of all transactions recorded in the balance of payments must be zero, as long as the capital account is defined broadly. The reason is that every credit appearing in the current account has a corresponding debit in the capital account, and vice-versa. History of Balance of Payments BOP Before the 19th century, international transactions were denominated in gold, providing little flexibility for countries experiencing trade deficits.
Growth was low, so stimulating a trade surplus was the primary method of strengthening a nation's financial position. National economies were not well integrated, however, so steep trade imbalances rarely provoked crises. The industrial revolution increased international economic integration, and balance of payment crises began to occur more frequently. The Great Depression led countries to abandon the gold standard and engage in competitive devaluation of their currencies, but the Bretton Woods system that prevailed from the end of World War II until the s introduced a gold-convertible dollar with fixed exchange rates to other currencies.
As the U. Since the Nixon shock —as the end of the dollar's convertibility to gold is known—currencies have floated freely, meaning that a country experiencing a trade deficit can artificially depress its currency—by hoarding foreign reserves, for example—making its products more attractive and increasing its exports. Due to the increased mobility of capital across borders, balance-of-payments crises sometimes occur, causing sharp currency devaluations such as the ones that struck in Southeast Asian countries in During the Great Recession , several countries embarked on competitive devaluation of their currencies to try to boost their exports.
Many of those nations responded by further loosening the reins on their monetary policy to support their exports, especially those whose exports were under pressure from stagnant global demand during the Great Recession. Special Considerations Balance of payments and international investment position data are critical in formulating national and international economic policy. Certain aspects of the balance of payments data, such as payment imbalances and foreign direct investment , are key issues that a nation's policymakers seek to address, While a nation's balance of payments necessarily zeroes out the current and capital accounts, imbalances can and do appear between different countries' current accounts.
The U. Economic policies are often targeted at specific objectives that, in turn, impact the balance of payments. For example, one country might adopt policies specifically designed to attract foreign investment in a particular sector, while another might attempt to keep its currency at an artificially low level to stimulate exports and build up its currency reserves. The impact of these policies is ultimately captured in the balance of payments data.
Funds entering a country from a foreign source are booked as credit and recorded in the BOP. Outflows from a country are recorded as debits in the BOP. For example, say Japan exports cars to the U. By contrast, the quality and features of a given consumer product will often be quite different depending on the producer e.
Some traditional examples of commodities include grains, gold, beef, oil, and natural gas. More recently, the definition has expanded to include financial products, such as foreign currencies and indexes. Technological advances have also led to new types of commodities being exchanged in the marketplace. For example, cell phone minutes and bandwidth.
Commodities can be bought and sold on specialized exchanges as financial assets. There are also well-developed derivatives markets whereby you can buy contracts on such commodities e. Those with a lower risk tolerance may consider a smaller allocation. Ordinary investors can look to one of several commodities ETFs or mutual funds to gain exposure.
Buyers and Producers of Commodities The sale and purchase of commodities are usually carried out through futures contracts on exchanges that standardize the quantity and minimum quality of the commodity being traded. For example, the Chicago Board of Trade CBOT stipulates that one wheat contract is for 5, bushels and states what grades of wheat can be used to satisfy the contract. Two types of traders trade commodity futures.
The first are buyers and producers of commodities that use commodity futures contracts for the hedging purposes for which they were originally intended. These traders make or take delivery of the actual commodity when the futures contract expires. For example, the wheat farmer who plants a crop can hedge against the risk of losing money if the price of wheat falls before the crop is harvested.
The farmer can sell wheat futures contracts when the crop is planted and guarantee a predetermined price for the wheat at the time it is harvested. Commodities Speculators The second type of commodities trader is the speculator. These are traders who trade in the commodities markets for the sole purpose of profiting from the volatile price movements.
These traders never intend to make or take delivery of the actual commodity when the futures contract expires. Many of the futures markets are very liquid and have a high degree of daily range and volatility, making them very tempting markets for intraday traders.
Many of the index futures are used by brokerages and portfolio managers to offset risk. Also, since commodities do not typically trade in tandem with equity and bond markets, some commodities can be used effectively to diversify an investment portfolio. Special Considerations Commodity prices typically rise when inflation accelerates, which is why investors often flock to them for their protection during times of increased inflation—particularly unexpected inflation. As the demand for goods and services increases, the price of goods and services rises, and commodities are what's used to produce those goods and services.
Because commodities prices often rise with inflation, this asset class can often serve as a hedge against the decreased buying power of the currency. Those interested in learning more about commodities and other financial topics may want to consider enrolling in one of the best investing courses currently available.
Examples of Commodities Commodities are basic goods and materials that are widely used and are not meaningfully differentiated from one another. Examples of commodities include barrels of oils, bushels of wheat, or megawatt-hours of electricity. Commodities have long been an important part of commerce, but in recent decades the trading of commodities has become increasingly standardized. The modern commodities market relies heavily on derivative securities, such as futures contracts and forward contracts.
Buyers and sellers can transact with one another easily and in large volumes without needing to exchange the physical commodities themselves. Many buyers and sellers of commodity derivatives do so to speculate on the price movements of the underlying commodities for purposes such as risk hedging and inflation protection.
What Determines Commodity Prices? Like all assets, commodity prices are ultimately determined by supply and demand.
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Retail investors should spend time learning about the forex market and then researching which forex broker to sign up with, and find out whether it is regulated in the United States or the United Kingdom U. It is also a good idea to find out what kind of account protections are available in case of a market crisis, or if a dealer becomes insolvent. Read on to learn about the forex markets, what it's used for, and how you can get started trading.
Key Takeaways The foreign exchange also known as forex or FX market is a global marketplace for exchanging national currencies. Because of the worldwide reach of trade, commerce, and finance, forex markets tend to be the largest and most liquid asset markets in the world.
Currencies trade against each other as exchange rate pairs. Forex markets exist as spot cash markets as well as derivatives markets, offering forwards, futures, options, and currency swaps. Market participants use forex to hedge against international currency and interest rate risk, to speculate on geopolitical events, and to diversify portfolios, among other reasons.
The foreign exchange market is where currencies are traded. Currencies are important because they allow us to purchase goods and services locally and across borders. International currencies need to be exchanged to conduct foreign trade and business.
If you are living in the United States and want to buy cheese from France, then either you or the company from which you buy the cheese has to pay the French for the cheese in euros EUR. This means that the U. The same goes for traveling. The tourist has to exchange the euros for the local currency, in this case the Egyptian pound, at the current exchange rate. One unique aspect of this international market is that there is no central marketplace for foreign exchange.
Rather, currency trading is conducted electronically over the counter OTC , which means that all transactions occur via computer networks among traders around the world, rather than on one centralized exchange. The market is open 24 hours a day, five and a half days a week, and currencies are traded worldwide in the major financial centers of Frankfurt, Hong Kong, London, New York, Paris, Singapore, Sydney, Tokyo, and Zurich—across almost every time zone.
This means that when the U. As such, the forex market can be extremely active anytime, with price quotes changing constantly. These terms are synonymous and all refer to the forex market. A Brief History of Forex In its most basic sense, the forex market has been around for centuries. People have always exchanged or bartered goods and currencies to purchase goods and services. However, the forex market, as we understand it today, is a relatively modern invention.
After the Bretton Woods accord began to collapse in , more currencies were allowed to float freely against one another. The values of individual currencies vary based on demand and circulation and are monitored by foreign exchange trading services. Commercial and investment banks conduct most of the trading in forex markets on behalf of their clients, but there are also speculative opportunities for trading one currency against another for professional and individual investors.
There are two distinct features of currencies as an asset class : You can earn the interest rate differential between two currencies. You can profit from changes in the exchange rate. An investor can profit from the difference between two interest rates in two different economies by buying the currency with the higher interest rate and shorting the currency with the lower interest rate.
Prior to the financial crisis, it was very common to short the Japanese yen JPY and buy British pounds GBP because the interest rate differential was very large. This strategy is sometimes referred to as a carry trade. Currency trading was very difficult for individual investors prior to the Internet. Most currency traders were large multinational corporations , hedge funds , or high-net-worth individuals HNWIs because forex trading required a lot of capital.
With help from the Internet, a retail market aimed at individual traders has emerged, providing easy access to the foreign exchange markets through either the banks themselves or brokers making a secondary market. Most online brokers or dealers offer very high leverage to individual traders who can control a large trade with a small account balance.
It is the only truly continuous and nonstop trading market in the world. In the past, the forex market was dominated by institutional firms and large banks, which acted on behalf of clients. But it has become more retail-oriented in recent years, and traders and investors of many holding sizes have begun participating in it. An interesting aspect of world forex markets is that there are no physical buildings that function as trading venues for the markets.
Instead, it is a series of connections made through trading terminals and computer networks. Participants in this market are institutions, investment banks, commercial banks, and retail investors. The foreign exchange market is considered more opaque than other financial markets.
Currencies are traded in OTC markets, where disclosures are not mandatory. Large liquidity pools from institutional firms are a prevalent feature of the market. A survey found that the motives of large financial institutions played the most important role in determining currency prices. Forex is traded primarily via three venues: spot markets, forwards markets, and futures markets. When people refer to the forex market, they are thus usually referring to the spot market.
The forwards and futures markets tend to be more popular with companies or financial firms that need to hedge their foreign exchange risks out to a specific date in the future. Spot Market Forex trading in the spot market has always been the largest because it trades in the biggest underlying real asset for the forwards and futures markets.
Previously, volumes in the forwards and futures markets surpassed those of the spot markets. However, the trading volumes for forex spot markets received a boost with the advent of electronic trading and the proliferation of forex brokers. The spot market is where currencies are bought and sold based on their trading price. That price is determined by supply and demand and is calculated based on several factors, including current interest rates, economic performance, sentiment toward ongoing political situations both locally and internationally , and the perception of the future performance of one currency against another.
A finalized deal is known as a spot deal. It is a bilateral transaction in which one party delivers an agreed-upon currency amount to the counterparty and receives a specified amount of another currency at the agreed-upon exchange rate value. After a position is closed, the settlement is in cash. Although the spot market is commonly known as one that deals with transactions in the present rather than in the future , these trades actually take two days for settlement.
Forwards and Futures Markets A forward contract is a private agreement between two parties to buy a currency at a future date and at a predetermined price in the OTC markets. A futures contract is a standardized agreement between two parties to take delivery of a currency at a future date and at a predetermined price. Futures trade on exchanges and not OTC. In the forwards market, contracts are bought and sold OTC between two parties, who determine the terms of the agreement between themselves.
In the futures market, futures contracts are bought and sold based upon a standard size and settlement date on public commodities markets, such as the Chicago Mercantile Exchange CME. Futures contracts have specific details, including the number of units being traded, delivery and settlement dates, and minimum price increments that cannot be customized.
The exchange acts as a counterparty to the trader, providing clearance and settlement services. Both types of contracts are binding and are typically settled for cash at the exchange in question upon expiry, although contracts can also be bought and sold before they expire. The currency forwards and futures markets can offer protection against risk when trading currencies.
Usually, big international corporations use these markets to hedge against future exchange rate fluctuations, but speculators take part in these markets as well. In addition to forwards and futures, options contracts are also traded on certain currency pairs.
Forex options give holders the right, but not the obligation, to enter into a forex trade at a future date and for a pre-set exchange rate, before the option expires. Unlike the spot market, the forwards, futures, and options markets do not trade actual currencies. Instead, they deal in contracts that represent claims to a certain currency type, a specific price per unit, and a future date for settlement. This is why they are known as derivatives markets.
Uses of the Forex Markets Forex for Hedging Companies doing business in foreign countries are at risk due to fluctuations in currency values when they buy or sell goods and services outside of their domestic market. Foreign exchange markets provide a way to hedge currency risk by fixing a rate at which the transaction will be completed.
To accomplish this, a trader can buy or sell currencies in the forward or swap markets in advance, which locks in an exchange rate. For example, imagine that a company plans to sell U. Unfortunately, the U. A stronger dollar resulted in a much smaller profit than expected. The blender company could have reduced this risk by short selling the euro and buying the U. That way, if the U. If the U. Hedging of this kind can be done in the currency futures market.
The advantage for the trader is that futures contracts are standardized and cleared by a central authority. However, currency futures may be less liquid than the forwards markets, which are decentralized and exist within the interbank system throughout the world.
Forex for Speculation Factors like interest rates , trade flows, tourism, economic strength, and geopolitical risk affect the supply and demand for currencies, creating daily volatility in the forex markets. A forecast that one currency will weaken is essentially the same as assuming that the other currency in the pair will strengthen because currencies are traded as pairs. The trader believes higher U. How to Start Trading Forex Trading forex is similar to equity trading.
Here are some steps to get yourself started on the forex trading journey. Learn about forex: While it is not complicated, forex trading is a project of its own and requires specialized knowledge. For example, the leverage ratio for forex trades is higher than for equities, and the drivers for currency price movement are different from those for equity markets.
There are several online courses available for beginners that teach the ins and outs of forex trading. Set up a brokerage account: You will need a forex trading account at a brokerage to get started with forex trading. Forex brokers do not charge commissions. Instead, they make money through spreads also known as pips between the buying and selling prices. For beginner traders, it is a good idea to set up a micro forex trading account with low capital requirements. Such accounts have variable trading limits and allow brokers to limit their trades to amounts as low as 1, units of a currency.
For context, a standard account lot is equal to , currency units. A micro forex account will help you become more comfortable with forex trading and determine your trading style. Develop a trading strategy: While it is not always possible to predict and time market movement, having a trading strategy will help you set broad guidelines and a road map for trading. A good trading strategy is based on the reality of your situation and finances.
It takes into account the amount of cash that you are willing to put up for trading and, correspondingly, the amount of risk that you can tolerate without getting burned out of your position. Remember, forex trading is mostly a high-leverage environment. But it also offers more rewards to those who are willing to take the risk.
Always be on top of your numbers: Once you begin trading, always check your positions at the end of the day. Most trading software already provides a daily accounting of trades. Make sure that you do not have any pending positions to be filled out and that you have sufficient cash in your account to make future trades. Cultivate emotional equilibrium: Beginner forex trading is fraught with emotional roller coasters and unanswered questions. Should you have held onto your position a bit longer for more profits?
How did you miss that report about low gross domestic product GDP numbers that led to a decline in overall value of your portfolio? Obsessing over such unanswered questions can lead you down a path of confusion. That is why it is important to not get carried away by your trading positions and cultivate emotional equilibrium across profits and losses.
Be disciplined about closing out your positions when necessary. Forex Terminology The best way to get started on the forex journey is to learn its language. Here are a few terms to get you started: Forex account: A forex account is used to make currency trades. Remember that the trading limit for each lot includes margin money used for leverage.
This means that the broker can provide you with capital in a predetermined ratio. Ask: An ask or offer is the lowest price at which you are willing to buy a currency. The ask price is generally greater than the bid price. Bid: A bid is the price at which you are willing to sell a currency. A market maker in a given currency is responsible for continuously putting out bids in response to buyer queries.
However, to achieve clear and exact results and a summary, the economist considers the following criteria in terms of a budget line: The consumer's income is given and remains consistent. Commodity prices are provided and remain constant. The customer is aware of the price of each commodity. It is expected that the customer spends and consumes the entire income. Requirements of a Budget Line The concept of the budget line, like most economic theories, is based on assumptions in order to produce simplified and clear analytic results.
Some of them are: A consumer's income is spent solely on the purchase of two commodities. A consumer's total monetary earnings are constrained and known. Both products' market prices are known to the customer. A consumer's total spending equals his or her total income. What is Meant by a Shift in the Budget Line? The consistency in budget line is controlled by the following factors — Income of consumer Prices of the two commodities Volume of the two commodities purchased While the quantity of the commodities purchased is, to a certain extent, in the control of the consumer, its price and consumer income changes with time.
It is this change that leads to the shift in the budget line. Impact of Change in Income - Reduction in income means contraction of his or her purchasing power and vice versa, causing the budget line to shift. Impact of Change in Price - Commodity price experiences volatility, and that it is inversely proportional to the purchases made by the consumer.
If the commodity prices reduce, it is likely that it may be purchased in greater quantities. Different Premises of Budget Line Determination of Market Prices of Commodities The budget line assumes that the market prices of the two commodities taken into consideration will always be in the knowledge of the consumer.
Any alterations in that regard will make the line infeasible. Information on Consumer Income It presumes that the income of the consumer pertains to a limited amount and that it is known accurately. Also, the allocation of resources is undertaken only for a known number of commodities. Number of Commodities The concept of a budget line is established based on only two commodities. It assumes that the demand of a consumer will be necessarily limited to only two commodities and not more.
Budget line definition investopedia forex 667 josephine place elizabethLecture 6. Budget line
A commodity is a basic good used in commerce that is interchangeable with other goods of the same type.
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|Budget line definition investopedia forex||We also definition investopedia original research from other reputable publishers where budget line. The break-even point is the level forex production at which the costs of production equal the revenues for a product. Breakouts can be subjective since not all traders will recognize or use the same support and resistance levels. The Asian financial crisis, also called the "Asian Contagion," was a sequence of currency devaluations and other events that began in July and spread across Asia. By contrast, the quality and read more of a given consumer product will often be quite different depending on the producer e. Full Bio Pete Rathburn is a freelance writer, copy editor, and fact-checker with expertise in economics and personal finance.|
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